News/  Comments

• Proposed to acqui re a parcel of industrial land with a 3- storey factory building in Pekan Baru Sungai Buloh for a total cash consideration of RM7.5m.

• The building which is approximately 3.5 years of age is currently unoccupied, proposed to be used as office and warehouse for Sasbadi Holdings and its subsidiaries.

• This acquisition will be funded via borrowings and cash, however, the proportion of both is yet to be determined.

• Expected to be completed in 3QFY16.

• We are positive on this acquisition as it will provide more room for Sasbadi’s future expansion. We note that Sasbadi’s current warehouse and office is already reaching towards full capacity.

• Management shared that for the new 3-storey building, one floor will be used for warehouse while the remaining two floors will be used as office.

• Assuming Sasbadi fully fund the acquisition via borrowings, gearing ratio will only be lifted from 0.1x to 0.17x, still very manageable, especially with its positive free cash flow of RM10.2m – RM19.1m. Note that prior to this transaction, Sasbadi also proposed to acqui re Sanjung Unggul, which has resulted in gearing ratio to increase from 0.06x to 0.1x.

Risks

• Not winning new textbook contract from MOE; Migration towards the online platform; Spike in paper prices; and Changes in National Curriculum and educational policies.

Forecasts

• No changes to our forecasts.

Rating

BUY

Positives

• (1) Long term catalysts from potential M&As and new curriculum for secondary schools; (2) Unique exposure to Malaysia’s education system; and (3) Defensive yet growing earnings base.

Negatives

• (1) Not winning new textbook contracts from MOE; (2) Rising paper prices; and (3) Low liquidity.

Valuation

• Share price has plunged by 16% since our previous report and downgrade, in tandem with the general market. Given that its potential upside is now more than 10%, we upgrade to BUY with unchanged TP of RM2.72 based on unchanged P/E multiple of 15.5x CY16 EPS or circa 50% discount to average P/E of education sector given its lower market capitalisation and liquidity. We think valuation is justified as Sasbadi has high growth rate and holds a unique exposure to the country’s education system.

Source: Hong Leong Investment Bank Research - 14 Aug 2015